Junk bonds of Trans World Airlines Inc. swooned yesterday as the ailing carrier confirmed a $420 million bid for bankrupt Pan Am Corp.
TWA owner Carl Icahn, who has been dickering with bondholders for months to restructure the company's debt, is now trying to win over Pan Am creditors as well. TWA, based in Mount Kisco, N.Y., yesterday said Mr. Icahn has offered to top an offer from Delta Air Lines Inc. for certain Pan Am assets, making a total of $420 million available to Pan Am's creditors.
At the same time, TWA said Mr. Icahn's offer to buy back some of TWA's own junk bonds, which was set to expire July 26, has been terminated.
TWA junk bonds slumped on the news, with its 15s of 1995 off about 2 1/2 points, at 58, in late trading. The carrier's 12s of 2008 slipped 1/2 point, to 12 3/4.
But traders said few bonds changed hands, noting many investors are taking a wait-and-see attitude about the offer.
"I haven't seen anything trade," said David Feinman, high-yield trader at Jefferies & Co. Other than TWA, "there's a reasonable amount of action" in high-yield bonds, though most issues finished flat to 1/8 point lower.
Likewise, most investment-grade corporates ended little changed yesterday.
"For TWA, this isn't positive, since their biggest concerns should be how they're going to restructure their debt," said Todd Schubert, senior associate at Kemper Securities Group in Chicago. "And the way Icahn has said if [TWA] bonds weren't tendered, he was going to throw TWA into Chapter 11, you wonder where they're going to get the money" to bid for a Pan Am.
TWA said Mr. Icahn offered to outbid Delta by $50 million at a Pan Am creditors meeting Sunday, saying it would sponsor a plan to bail out the bankrupt airline with a $140 million equity infusion from TWA or other outside investors. That would leave the reorganized Pan Am in the hands of Pan Am's creditors, TWA, and any outside investors.
But market players noted Mr. Icahn has been negotiating to restructure TWA's bonds for months. That track record had some analysts and traders doubting TWA's intentions and viewing the Pan Am bid as another attempt to strongarm creditors.
In May, TWA said it would tender for seven of its outstanding debt issues as the first step in a restructuring designed to keep the airline alive. The troubled carrier, already in default on $300 million of its debt, was widely expected to follow carriers such as Eastern Airlines Inc. and Pan Am into Chapter 11. Since then, Mr. Icahn has continued to haggle with bondholders, threatening bankruptcy only to later extend his tender offer.
"People are curious as to whether [Mr. Icahn] is making a good-faith bid or doing a head-fake for TWA bondholders," said one New York analyst. "He'd be more than happy to win at that bid price, but he's spending money that bondholders where hoping to get at the same time."
Elsewhere in the straight corporate bond market, yield spreads remain tight in the industrial, utility, and finance sectors, while risk premiums on bank paper have widened slightly in recent sessions.
Long-term double-A industrial issues now trade about 100 basis points over the bellwether Treasury long bond, about where they've traded for the past six weeks, according to Mabon Securities Corp.
Despite such attractive spreads, syndicate desks in the straight debt market were becalmed yesterday ahead of this week's heavy supply in the Treasury sector.
But retailing giant Sears, Roebuck & Co. managed to land off-balance-sheet financing with $550 million of securities backed by credit and receivables.
Issuing through a special trust, Discover Card Trust 1991-B, Sears sold $500 million of class A certificates priced with a 8.625% coupon to yield 75 basis points more than the when-issued five-year Treasury note.
The offering, sold through Sears's Dean Witter Reynolds unit, carries triple-A ratings from the major agencies.
A $50 million class B tranche was was priced as 8.85s to yield 97 basis points more than Treasuries.
That piece carries an Aa2 from Moody's Investors Service and AA from Standard & Poor's Corp.